The Truth About Saving Money in Your Twenties

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At the start of your twenties, you likely have no money in the bank. Unless you have inherited money or started working young, you have had no opportunity to save. It’s in this context that young people have been advised over the years to start saving as soon as possible. By the end of your twenties, they say, you should already have a growing rainy-day fund.

This can lead to a lot of stress, especially for people starting low-income or part-time jobs. How much can you really put away when you’re struggling to make ends meet? For many young people new to the workforce, saving is something to worry about despite it being unachievable.

But is it really necessary to start saving money in your twenties? A recent paper by James Choi, a professor of finance at the Yale School of Management, says otherwise. While there are guidelines of how much you should have in your savings by the age of 35, it is probably not necessary to have started that fund before the age of thirty.

Here are some of his most significant findings.

You don’t need savings just yet

On a purely economic level, Choi found that having savings in your twenties is a luxury rather than a basic necessity. While it’s always important to have some emergency funds available, you don’t need to save towards your future until later in life. This won’t put you at risk of not having enough money saved for retirement or other important milestones.

In fact, if you are not earning all that much in the first place, what you save now will make very little difference to your eventual savings account. All it will do is leave you wanting at the end of every month.

But experts who recommend saving in your twenties are not only talking about the size of your savings account. Rather, they are suggesting that you start building habits. This may sound like good advice, but it is not necessarily the case.

Habits require context

For some people, getting into the habit of saving is a good way to start their financial lives. It ensures that they have momentum by the time saving becomes truly necessary. However, for other people, building a habit in their twenties has negative impacts that outweigh the benefits.

Instead of using their money to make ends meet, they take on debt. Instead of using extra funds to live some of their dreams, they put it in a savings account that is earning them minimal cash. They lose out on experiences and end up more stressed because of their tight budgets.

Might this lead to better savings behavior further down the line? Possibly. Is it worth it? That depends entirely on your personal situation. If you know that saving is important and work towards getting to a place where saving is comfortable rather than a mere habit, that might be the better route to take.

Further questionable advice

Choi did not only take issue with the idea that all people in their twenties should save. He also showed skepticism in some common advice that has become conventional wisdom. For example, the idea that a person should save the same proportion of their income throughout their lives is flawed, because the affordability of doing so changes according to your needs and your income.

Another piece of advice that is commonly shared is to pay off your smallest debts first. On a purely economic level, that does not quite work. Beginning to pay off your debts with the highest interest is a better way to get your debt under control. While it can feel good to pay off a small debt entirely, you lose out by paying more compound interest in the meantime.

Choi admits that his paper does not entirely take human nature into account. The advice given by popular finance books about saving in your twenties may have some value for people whose personalities work a certain way. That being said, it is clear that the advice given by those books should not be taken as universal.

Perhaps the biggest lesson here is that personal finance is, in fact, personal. Different people have very different personalities, and your needs differ considerably based on your lifestyle, earnings, and profession. Take yourself into account when choosing when and how to save money, rather than taking one-size-fits-all advice from a book.